SoftBox Limited produces lighting equipment for cameras. SoftBox Limited is based in the UK and operates using a divisionalised structure.

Division A produces a component, SBG, which Division B uses in the production of finished lighting units, called ‘Lightdars’. Division A sells completed SBG units to Division B; Division B then uses the SBG units to produce Lightdars, which are sold to the external market. There is also an external market for the SBG units. The following information has been provided:

DIVISION A: production of SBG units
Selling price per unit	External	£61.00
	Internal	£57.00
Variable costs per unit	All sales	£45.00
Delivery cost per unit	External sales only	£1.00
Fixed costs per month		£221,000
Sales demand per month	External	15,000 units
	Internal	20,000 units
Production capacity per month		25,000 units
DIVISION B: production of Lightdars units
Selling price per unit		£70.00
Production costs per unit		£15.00
Purchase cost of SBG units	External	£61.00
	Internal	£57.00
Fixed costs per month		£155,000
Sales demand per month	External	20,000 units
Production capacity per month		50,000 units

Requirements

1. Discuss the advantages and disadvantages of an organization adopting a divisionalised structure.

(maximum 240 words)

(12 Marks)

2. Currently, Division A is forced to fulfil Division B’s demand before selling any units externally. Prepare calculations to determine the current profits for Division A, Division B and the group as a whole. State any assumptions you have made in preparing your calculations.

(no word count)

(8 Marks)

3. The manager of Division A is trying to persuade the Group Director to allow Division A to sell as many units as it wants to the external market; the manager

of Division A has suggested that this level of autonomy will motivate him and his workers. Assuming Division A is free to sell as many units as it can to the external market, prepare calculations to determine the expected profits for Division A, Division B and the group as a whole. State any assumptions you have made in preparing your calculations.

(no word count)

(8 Marks)

4. The Group Director believes that the group as a whole would benefit if Division B is able to purchase its full requirement of SBG units from Division A. She is therefore encouraging the managers of Division A and Division B to work together to negotiate a transfer price that will encourage Division A to sell internally, in order that Division B will not have to purchase units from the outside market. Suggest a solution that may be accepted by the managers of both Division A and Division B, preparing profit calculations to show the impact on the profits of Division A, Division B, and the group as a whole. State any assumptions you have made in preparing your calculations.

(no word count)

(14 Marks)

5. Discuss the advantages and disadvantages of allowing divisional managers to negotiate transfer prices.